Understanding B shares mutual funds: Fees and expenses

Mutual funds are becoming the go-to choice of investors owing to the extensive advantages and profits they bring in the long run. The diversification within the mutual funds further allows investors to opt for a mutual fund investment opportunity that best suits them. In this article, we will look at the class B shares mutual funds and the difference between class a and b shares.

What is a B-share mutual fund? 

Mutual funds come with various distinctions to suit the requirements of different investors. There are broadly three categories of mutual funds, A-shares, B-shares, and C-shares based on the fees and expenses they charge. 

The B shares mutual funds charge a sales load from the investors. They are required to pay a sales charge at the time of redeeming the fund. These share types also have a higher expense ratio compared with the A-share funds. 

Fee structure of B-shares

While the A-share mutual funds incur a front-end sales load, the B-shares incur a back-end sales load often known as the contingent deferred sales charge or CDSC. With the back-end load charges, investors must pay a fee when they plan to exit from the mutual fu

This means that all the money an investor plans to invest is invested in the fund without any cost deduction in the form of an investment fee. It works in favour of the investor because without the fee, their investment amount gets increased and so do their expected returns in the future. 

A contingent deferred sales charge is applied at the time of exiting the mutual fund in a certain time frame only. This period is usually the first 6 years after the investment in a mutual fund is made. The longer the period for which an investor holds the stock, the more the charges keep decreasing till the point they are finally eliminated after several years of holding the fund. 

After an amount of time post-elimination, typically two years, the class B shares mutual funds get converted to class A shares which provides the investors access to comparatively lower annual expense ratios. 

However, keep in mind that the sales load is different from the operational expenses of the fund which must be understood at the time of investing in the mutual fund. 

Expenses of B-shares

Since the B-share mutual funds fall under the category of retail share class, 12b-1 fees are levied on the operating expenses associated with these shares. These fees allow the intermediaries and the distributors to be compensated for the sales and the marketing process of the mutual funds. 

Usually, the 12b-1 fees incurred on the B-shares are higher than other mutual fund types because of the absence of the front-end loads. Additionally, they might have the applicability of commission fee as well which might reduce over time. 

Because of these factors, the B-shares have the highest expense ratios since the 12b-1 fees are drawn from fund assets instead of being drawn directly. Besides these costs, investors are also supposed to pay the operating and standard management expenses. 

Comparison between class A and class B shares 

Usually, mutual fund advisors recommend investing in class A mutual funds. These funds have a commission charge that must be paid at the time of investment which gets reduced on the purchase of multiple mutual funds. Additionally, investors who hold other securities in the same fund are also capable of availing of the discount. 

As against this, there is no front-end cost associated with class B shares. There is no fee charged at the time of investing in the share but a fee is charged when the investors redeem their shares before 6 years from the date of the purchase of the fund. 

Another difference between class A and B shares is the 12B-1 fee. The marketing and operational fees charged by class A shares are significantly lower than those charged by class B shares. 

Investors must also keep in mind that if the class B shares are held for a long time, they get converted to class A shares. 

When to choose B-shares mutual funds? 

Investors can study the features of all three classes of mutual funds and invest their money in the fund that best suits their requirements. The first thing to assess is whether investors wish to invest in a load or a no-load fund. Usually, traders who have years of experience in the financial market can opt for no-load funds and use that money to make more investments and reap more profits. 

As against this, investors who have relatively less experience investing in mutual funds must seek the services of a financial expert. Additionally, if the investors are confident that they can hold the mutual fund for a period longer than 5 years, then also investing in class B mutual funds is an advisable decision. 

However, no final decision should be made without studying the expense ratio associated with the fund. The expense ratio of class B funds is usually greater than class A funds. This is one of the most important factors to consider as it directly impacts the return on the fund. 

Conclusion 

It is crucial to consider all the features, the expenses, and the costs that are associated with B-share mutual funds before investing in them. Further, the investors must do a comparative analysis based on factors such as returns, expense ratios, and fees between A, B, and C-type mutual funds before choosing one. To learn more about mutual fund investments, read StockGro blogs. 

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